Now it’s time to put those Jedi divergence mind tricks to work and force the markets to give you some pips!
In this lesson, we’ll show you some examples of when there was a divergence between price and oscillator movements.
How to Trade a Regular Divergence
First, let’s take a look at regular divergence.
Below is a daily chart of USD/CHF.
We can see from the falling trend line that USD/CHF has been in a downtrend.
However, there are signs that the downtrend will be coming to an end.
While the price has registered lower lows, the Stochastic (our indicator of choice) is showing a higher low.
Something smells fishy here.
Is the reversal coming to an end? Is it time to buy this sucker?
If you had answered yes to that last question, then you would have found yourself in the middle of the Caribbean, soaking up margaritas, as you would have been knee-deep in your pip winnings!
It turns out that the divergence between the Stochastic and price action was a good signal to buy.
Price broke through the falling trend line and formed a new uptrend.
If you had bought near the bottom, you could have made more than a thousand pips, as the pair continued to shoot even higher in the following months.
Now can you see why it rocks to get in on the trend early?!
Before we move on, did you notice the tweezer bottoms that formed on the second low?
Keep an eye out for other clues that a reversal is in place.
This will give you more confirmation that a trend is coming to an end, giving you even more reason to believe in the power of divergences!